BioDelivery Sciences International, Inc.
Q3 2017 Earnings Call Transcript

Published: 10 Nov 2017

[Operator:]

Please standby, we are about to begin. Good day, everyone. And welcome to the BioDelivery Sciences Third Quarter 2017 Earnings Conference. Today’s conference is being recorded. At this time, I would like to turn the conference over to Al Medwar. Please go ahead, sir.

[Al Medwar:]

Good afternoon. This is Al Medwar Senior Vice President of Corporate and Business Development for BioDelivery Sciences. And welcome to the BioDelivery Sciences third quarter 2017 earnings conference call. Leading us through the call today are Dr. Mark Sirgo, President and Chief Executive Officer; and Ernie De Paolantonio, Chief Financial Officer. Scott Plesha, Senior Vice President of Sales and Marketing; and Mike Bullock, National Director of Managed Markets will join us for the question-and-answer session following prepared remarks from Mark and Ernie. In order to thus communicate the data that will be discussed during this call we will be using slides. Those on the webcast will be able to follow along with the presentation and for those joining by phone the slides are posted on the BDSI website. That said, I will now read the company’s Safe Harbor statement. Certain statements of BDSI’s management made during today’s call or in responding to questions and any other public documents of BDSI or statements of its management may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. As forward-looking statements are based on management’s current beliefs and assumptions about the future but are not statements of fact and therefore involve and are subject to significant risks and uncertainties. Forward-looking statements may include, without limitation, statements with respect to BDSI’s plans, objectives, projections, expectations and intentions, and other similar statements about the future. Forward-looking statements are typically identified by words such as projects, may, will, could, would, should, believes, expects, anticipates, estimates, intends, plans, potential or similar expressions. These statements are based upon the current beliefs and expectations of BDSI’s management and are subject to significant risks and uncertainties, including those detailed in today’s conference call, as well as BDSI’s filings with the Securities and Exchange Commission. Please note that actual results, including without limitation, results of the commercial launch of BUNAVAIL and BELBUCA and the clinical trials for an FDA review of BDSI’s product and development may differ significantly from those set forth in the forward-looking statements. The risks and uncertainties relating to forward-looking statements are also subject to change based on various factors, many of which are beyond BDSI’s control. BDSI undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. You’re advised to review BDSI’s SEC filings for risk factors that could impact BDSI’s ability to achieve these goals described in the forward-looking statements. And with that, I’ll turn the call over to Mark Sirgo. Mark?

[Mark Sirgo:]

Thank you, Al. Good afternoon, everyone, and thank you for joining BDSI's Third Quarter 2017 Financial Results and Business Update Conference Call. I'm pleased to have the opportunity today to update you on our continued progress with BELBUCA through the third quarter of this year. We have generated solid growth with this product since its reacquisition earlier this year, and I will share with you today number of updated key metrics that support our continued optimism that BELBUCA is being built into a sustainable brand. Along these lines, I will also review our BELBUCA growth strategy as we approach 2018. Let me begin with a brief high-level review of our third quarter financials and key accomplishments. Our net revenue for the third quarter of 2017 totaled $11.3 million, an increase of 29% over the second quarter of this year and substantially greater than a $3.6 million for the same period last year. Ernie will be covering the third quarter financials in more detail shortly. Second, we achieved 15% growth in BELBUCA prescriptions from Q2 to Q3, and this growth is continuing into fourth quarter as October was our highest BELBUCA prescription month-to-date. Given we only assumed control over this asset in January, we're extremely pleased with the healthy demand for this product again this quarter, that has been driven in part by 700 first-time prescribers. We believe our messaging around the safety benefits of BELBUCA in the midst of this opioid crisis is resonating. In addition, our results are a reflection of the fine job that's Scott Plesha along with his managers and sales team are doing in executing our strategy. In addition to the financial metrics in BELBUCA growth, we also signed an exclusive agreement with Purdue Pharma in Canada for the licensing, distribution, marketing and sales in Canada of BELBUCA, which received marketing approval from Health Canada in the second quarter along with market authorization, triggering a milestone payment to BDSI. As a reminder, we expect Purdue to launch BELBUCA in Canada in early 2018. Now subsequent to the close of the quarter, we entered into an important Paragraph IV settlement agreement with Teva Pharmaceuticals involving BUNAVAIL. Now as part of the agreement, BDSI entered into a nonexclusive license with Teva that will not allow them to begin selling a generic version of BUNAVAIL in the U.S. until July 23, 2028 or potentially earlier under certain conditions. As such, the settlement provides additional certainty with respect to our patent portfolio, while averting future cost associated with the litigation. Importantly, we have begun to take a more active role in the opoid addiction crisis conversations going on in Washington, with government regulatory agencies and legislators in order to help shift the focus to solutions for this continued crisis in the U.S. As part of this effort, I recently participated in a roundtable meeting convened by the U.S. Department of Health and Human Services. At the meeting, I had the opportunity to highlight BDSI's innovative BEMA drug delivery platform and our products and communicate the safety benefits we believe BELBUCA offers over category 2 opioids when indeed opioid therapy is being considered for chronic pain. I've also already had a follow-up meeting with this particular agency. Our goal in these meetings and activities is twofold. First, to position buprenorphine for chronic pain as an effective, yet safer alternative for the category 2 opioids. And second, to take the steps through appropriate changes in product labeling and chronic pain treatment guidelines that address these benefits and in a way that will provide maximum access to our products. And finally, I'm pleased to report that based on our achievements of certain financial criteria, which occurred during the quarter, we had met the conditions necessary to assess that we choose the next $15 million tranche related to our loan agreement with CRG. We elected to draw this additional $15 million that will provide us cash runway into 2019. Now let me review BELBUCA's performance in more detail and share with you some key sales metrics for the third quarter. First, looking at weekly BELBUCA total prescriptions since the beginning of the third quarter, we continue to see a solid upward trend. Moreover, as you can see from the chart, we reached new highs at the end of the quarter that were surpassed shortly thereafter when we recorded our highest weekly prescription total to date in the second week of October with nearly 2,000 prescriptions. So we had a terrific third quarter and have carried that momentum into the fourth quarter. Now when you look at the next slide, you'll see the impact of the growth on monthly total prescriptions for BELBUCA. We achieved an all-time high in BELBUCA total prescriptions in October based on preliminary sales data and well exceeded the previously monthly high nearly 8,000 prescriptions achieved in August. We're very pleased with the growth we've delivered, which is significantly beyond what Endo had achieved and in less than 3 quarters of active selling since we reacquired the product with a more focused commercial effort, which includes a substantially smaller salesforce. Now you saw from the last couple of slides, that we're seeing solid growth in prescriptions. Note that our overall sales include an increase in the average price per prescription. We believe that as health care practitioners are becoming increasingly more comfortable with BELBUCA, its efficacy and safety profile, titrating patients to optimal pain control as well as prescribing BELBUCA to patients with more severe pain, both of which a result in the use of higher dose strengths. So the average price per BELBUCA prescription increased to $377 in September according to data from Symphony Health compared to $253 in the first 4 months following launch, representing an increase of nearly 50%. Now this increase the vast majority as related to use of higher dose strengths of BELBUCA, though I previously disclosed 9% price increase was established during the first quarter of this year. To summarize our BELBUCA performance metrics, I'd like to make some comparisons between January 2017 when we first reacquired the product and September 2017 based on data from Symphony Health. Total prescriptions in January were 5,851 versus 7,650 in September, represent an increase of 30%. Additionally, our share of the buprenorphine market for chronic pain, which consists of BELBUCA and buprenorphine transdermal patches has increased from 9% to 14%. And importantly, buprenorphine remains the only growing segment of the opioid market. And I think that speaks volumes to our safety messaging. Also the price per BELBUCA prescription has risen from 325 in January to 377 in September. Finally, the net sales run rate in September was approximately $31 million versus $22 million at the end of 2016, which is an increase of over 40%. Now based on this collective metrics, we remain confident that our focused strategy and product messaging is working well and having a positive impact on sales and key prescription trends. Now let me move to perhaps the most relevant topic for our business currently and for some time to come. As we are all aware, there has been a rapidly evolving conversation about opioids, pain management and addiction treatment across the national news media as well as among policymakers in Washington. This is evidenced by the President’s declaration late last month that the opioid crisis is a public health emergency, and Governor Christie's recommendation provided in letter to the President on November 1 based on task force that the governor led. As a result of all these announcements, lawmakers on every level are scrambling to better understand opioids while responding to the crisis. As old policies are being reevaluated and new ones are being formulated, BDSI is working with both the public and elected officials to understand how our unique products could play an important role in helping to mitigate the serious crisis. BDSI must be at the forefront of these important policy changes. And with that in mind, we've retained the services at the end of last quarter 2 Washington D.C. based consulting firms. One is working to help ensure BDSI has a seat at the table and a direct line of communication to key lawmakers as they consider major policy changes that could have a positive and lasting impact on overall opioid use, including BELBUCA. The second firm is working to ensure the news media, key thought leaders and political influences understand what sets BDSI's product and the unique and positive role we can play. Their work began at the end of last quarter, and we're already seeing the benefit of their interactions on our behalf, particularly in organizing meetings with key government and agency officials. As such, we are very optimistic about the potential results of the work we will be doing together in the weeks ahead as the effort to curb this opioid crisis evolves. Also over the last couple of weeks as mentioned earlier, I had the honor of participating in a roundtable meeting with 9 other companies convened by the U.S. Department of Health and Human Services and spent 2 full days on Capital Hill, meeting with policymakers, including congressman, members of the house and Committee and Committee, also officials that help in Human services and North Carolina's federal and congressional representatives BDSI's work on buprenorphine and how can play a role in part of the solution to the opioid crisis. Based on conversations like these, I'm optimistic that buprenorphine is now becoming more recognized for its benefits and will play an increasing role in management of chronic pain in this country. We must work with these agencies to achieve BELBUCA product labeling that truly reflects the safety differences between buprenorphine and category 2 opioids and work to have buprenorphine add as the keep treatment guidelines. These efforts should result in patients having better access to buprenorphine-containing products to treat chronic pain. So now let's turn to our strategy for driving growth in fourth quarter and beyond with BELBUCA. This strategy begins with the progress we're making with managed care access. Specifically, BELBUCA's covered on formularies that represent approximately 86% of the commercial prescription claim potential of this category, with BELBUCA available without restrictions beyond label, meaning following use of short-acting opioids in approximately 70%. Furthermore, we're pleased to see prescriptions for BELBUCA proved nearly 80% of the time within commercial plans. And as shown here, BELBUCA now has preferred coverage with 2 of the largest commercial plans in the country, United Healthcare, which moved BELBUCA to preferred status early this year and CVS Caremark, where BELBUCA will move to preferred status effective January 1, 2018. Now this is important as we've seen good prescription uptick with United Healthcare over the past several months. In fact, our UHC prescriptions are up nearly 60% since January with 1,125 prescriptions in October alone. Now BELBUCA also has coverage for label with a number of other key commercial plans, including Express Scripts, Therapeutics and Aetna. A particular focus is coming will be working to improve access among the plans of BELBUCA is not yet covered or is covered with restrictions such as those highlighted in yellow and red that represent about 30% of the commercial plans. In some plans, patients are required to use more addictive, Schedule II opioids such as oxycodone and fentanyl before they have access to BELBUCA. This is not an acceptable practice in the midst of an opioid epidemic, and it's an excellent example of what we are discussing with government agencies to make sure there is access for less addictive opioids over generic, immediate release from long-acting Scheduled II products. Now along this lines, I will point you your attention to recent New York Times article, highlighting this very issue. The article summarizes how some insurers are limiting access to pain medications that carry a lower risk of addiction or dependents while providing comparatively easy access to cheaper generic Schedule II opioids. The article makes specific reference to Butrans, which is the buprenorphine's thermal patches and points to the fact that Schedule II opioids like morphine are often made easily accessible by payers while less addictive Schedule III such as Butrans often require prior authorization or can't be used until failure of a Schedule II opioid. Again, this is the mdist of an opioid crisis. And as a result of this increased attention and scrutiny, insurers are now beginning to be called upon to explain their actions. This is certainly something to keep an eye on going forward and could have a significant impact on BELBUCA. In fact, we're beginning to see signs that the pressure maybe impacting the actions of some insurers, which should continue to lower our barriers to access. Now before leaving the managed care coverage, let's review where we stand with Medicare and the opportunity going into 2018. Part of the reason our interest in Medicare is the size of the overall prescription volume in this segment. In August, Medicare represented approximately 39% of all the long-acting opioid market. As you can see depicted here, Butrans was the second most commonly dispensed branded, long-acting opioid within Medicare and represented over 11% or 148,000 claims in the past 12 months. Importantly, when looking at the moving annual total prescription claims for buprenorphine products for the treatment of chronic pain, BELBUCA Medicare plans have increased over 50%. Now based on the formularies published last month for 2018, plans including Express Scripts, impact, which represent up to as much as 40% of total claims for opioids will add BELBUCA on January 1. Where we do not yet have contracts, we intend to bid formulary addition as well as request ads, meaning we request additions without waiting for the next calendar cycle immediately. Importantly, however, regardless of the formulary addition, we are currently seeing high approval rates among many Medicare plans who now on formulary with an average of 3 and 4 prescriptions being approved. The use of buprenorphine products in this group, we believe, points to the particular benefits in the elderly patient, where a low rates of constipation, cognitive impairment and concern over respiratory depression are a particular importance. So in summary, as we look at catalyst that will continue to drive BELBUCA sales, our primary emphasis will remain on our focus sale efforts, which is supported by our new promotional campaign and marketing activity. As we have previously discussed and budgeted for, we will continue to move toward the optimal salesforce size, which we believe is in the range of 85 representatives from our current 65. And as such, we'll be bringing on additional sales representatives in early 2018. We also expect to drive sales through additional managed care access the first half the year, with both implementation of new commercial contract as I've mentioned and the Medicare business. Another important catalyst for BELBUCA is the expected launch in Canada in early 2018, along with our continued pursuit of additional ex U.S. license agreements. And finally, potential regulatory policy changes for the use of buprenorphine products for chronic pain beyond our ongoing efforts with government agencies and key legislators. With that, let's turn to BUNAVAIL. Let me begin by reviewing our third quarter sales followed by our commercial strategy for this product. Net revenue for BUNAVAIL in Q3 was $1.7 million, an increase of over 30% from $1.3 million in Q2. Now this increase was in part due to improvements in the gross to net deduction from Medicaid despite prescriptions as the graph shown here depicts declining by a 11% in the quarter. Now while this was less of a decline and was seen in Q2, as a reminder, by design, we significantly reduced our commercial effort with respect of BUNAVAIL in 2017 as we focused the majority of the efforts of the salesforce on the relaunch of BELBUCA. As such, the decline in BUNAVAIL sales is a direct reflection of that decision. However, we believe BUNAVAIL business is becoming stabilized around current levels and are going forward ability to enhance BUNAVAIL sales through new and in some cases improved managed care contract opportunities, which is our strategic focus for the product. And as mentioned earlier, an important development around BUNAVAIL is the settlement of the litigation with Teva. Teva has been provided a nonexclusive licensing agreement, which permits Teva to begin selling its generic version of BUNAVAIL no sooner than July of 2028. This is important to us as it adds additional certainty to the patent portfolio, in shorter term for the cost associated with the litigation. In addition, it also enhances the value of BUNAVAIL involving any potential strategic alternatives we may consider in the future for the product. So in summary, we recognize the size and growth opportunity in the opioid dependence market, particularly with the federal government's efforts increasing access to all buprenorphine-containing products, along with the increase in access to care with cap lift in the opening of prescribing to PAs and NPs, and we firmly believe that even given our current sales efforts, that remains opportunity for growth through improved managed care contracting. Now before I end my formal comments with our upcoming milestones, I'd like to point out that this will be my final conference call as BDSI's President and CEO. As I noted back in August, I'll be retiring from my day-to-day role in the company early January, though I'll remain active in the company's future as Vice Chairman of the Board. Please rest assured we have an excellent senior management team in place and are well positioned for long-term value creation. Process identifying my successors continuing as planned with our intention to have a new President and CEO named by the end of the year. I continue as Vice Chairman will allow for very smooth transition. And with that, I want to thank those who have supported me over the last 13 years as the company involve from a preclinical startup to a fully integrated pharmaceutical company, where we have been fortunate to bring 3 products to market that are making a difference in the lives of so many patients and their families. Now I'm pleased to have been able to contribute to this significant evolution of the company, and I want to thank all the great employees, who have helped make this happen, and particularly the one across from the who is running for all these years. And finally, I look forward to continuing to serve the company and our shareholders as Vice Chairman. So as we close the year and look into 2018, we'll remain highly focused on continued growth of BELBUCA prescriptions. This will be supported by a major push to influence of legislation in policy regarding the use of opioids and bringing the benefits of buprenorphine to the forefront as they should be, which can greatly benefit both BELBUCA and BUNAVAIL. In addition, we look forward to the launch of BELBUCA in Canada and the expected return of the U.S. market place. With that, I'll turn things over to Ernie to cover the financials in more detail and then we'll open things up to Q&A. Ernie?

[Ernie De Paolantonio:]

Thank you, Marc, and good afternoon, everyone. Before I review our financials for the third quarter, I want to remind everyone to refer to our 10-Q, which will be filed this evening and provided a more thorough review of our financials. Let me start by reminding everyone that the 2 noncash impact items related to the reacquisition of BELBUCA and the termination of the Endo licensing agreement that occurred during the first quarter of 2017. The first item is the $45 million intangible created as a result of the favorable impact of the BELBUCA valuation. The amortization of the intangible is a noncash charge in G&A at $1.1 million per quarter or $4.5 million per year over the next 10 years. And the second item is a $3.2 million of fair value assigned to the inventory purchased from Endo as part of the transaction. This noncash charge will be reflected in the cost of goods as the purchased inventory is sold, which we estimate will be completed during the remainder of 2017. Now for the review of the third quarter financials. For those following on the online presentation, please reference Slide #25 labeled BDSI Q3 P&L. Let's start with the far left-hand column labeled unadjusted P&L. This column represents the P&L prior to any of the noncash BELBUCA adjustments just mentioned. The net revenue for the quarter was $11.3 million, a 29% increase versus $8.7 million in the second quarter and $3.6 million for the third quarter of 2016. As Mark commented earlier, BELBUCA prescription volume was strong and increased 15% over the second quarter. However, based on a one-time stimulative gross to net adjustment to reflect actual commercial contract utilization that was higher than Endo's original estimate, which we carried over from the reacquisition, BELBUCA net revenue for the third quarter was $6.4 million and slightly lower than second quarter revenue of $6.6 million. Going forward, our gross to net estimate now reflects our anticipated utilization and is in the mid to upper 30% range. BELBUCA net revenue was $1.7 million compared to $1.3 million in the second quarter, yielding total product net revenue of $8.1 million. Sales and marketing operating expenses for the third quarter were $5.3 million and approximately $2 million less than last quarter. General and administrative expenses were $8.5 million, and R&D expenses were $2 million. Overall, total unadjusted operating expenses for the third quarter were $15.8 million and yielded a net loss of $10.1 million or $0.18 a share. The second column from the right labeled, fair value, shows the impact of the noncash Endo transaction items referred to earlier, the inventory purchased and the amortization of the intangible. The total impact of these 2 adjustments was $1.8 million or $0.03 per share. There is another $0.4 million of fair value from purchased Endo inventory that we anticipate should be sold by the end of 2017 and included in our fourth quarter results. The far right-hand column represents the adjusted quarterly P&L with the total impact of the BELBUCA purchase for a loss of $12 million or $0.21 per share this quarter. Moving to Slide 26, labeled key financials Q3 2017 versus Q3 2016 GAAP versus non-GAAP. We recognize that non-GAAP earnings excluded from the noncash items listed in flip notes 1 and 2 at the bottom of the slide for a net loss of $5.8 million or $0.10 per share in 2017 compared to 2016's loss of $11.7 million or $0.21 per share. On Slide 27, BDSI year-to-date P&L focus on the far right column after the accumulated Endo purchase adjustment labeled adjusted P&L. Year-to-date, net revenue for 2017 totaled $49.5 million and includes $23.8 million of product revenue, $7.6 million for BELBUCA and $6.2 million for BUNAVAIL. $3.7 million of royalty revenue for BELBUCA and BREAKYL, $20 million of deferred revenue that was released as part of the Endo reacquisition and $1.2 million of milestone revenue for the Purdue Canada agreement versus 2016 9-month revenue of $11.6 million, consisting mainly of $6.2 million of BUNAVAIL revenue, $2.4 million of BREAKYL and BELBUCA royalty and $2.5 million for the upfront payment for U.S. on solace marketing rights. Total year-to-date operating expenses of $50.3 million were $1 million less year-over-year versus 2016, due primarily to the reduction in R&D expenses, offset by higher legal expenses and the amortization of the BELBUCA intangible. Net profit year-to-date 2017 is $21.5 million or $0.39 per basic share and $0.38 per diluted share compared to a prior year net loss of $51.2 million or $0.96 per diluted share. Moving to Slide 28, key financials GAAP versus non-GAAP. 2017 non-GAAP earnings year-to-date exclude the items listed in the footnotes 1 and 2 at the bottom of the page for non-GAAP net income of $37.8 million or EPS of $0.67 per share compared to a 2016 net loss of $39.6 million or $0.74 per share. Our cash balance at September 30 of $19.7 million represents a $7.8 million net cash reduction to the second quarter balance. Subsequent to the third quarter close, BDSI qualified for the second tranche of $15 million of additional funding from CRG. As Mark mentioned, should BDSI decides to exercise this option, that additional funding would be enough to fund our operations into 2019. Now let me turn it back to Mark for the Q&A session.

[Mark Sirgo:]

Thanks, Ernest. Operator, if you could put through the first question.

[Operator:]

Certainly. Our first question comes from Brandon Folkes with Cantor Fitzgerald.

[Brandon Folkes:]

Hi, guys. Congratulations on everything during the quarter. Firstly, what do you think will get insurers to remove the [indiscernible] that’s facing BELBUCA at the moment? Does this have to be driven by the government agency actions or do you think this could happen over time without intervention? And then just following on that, how can you place BELBUCA to benefit from actions taken by agencies such as the potential removal of Oxymorphone from the market? And then lastly just while BUNAVAIL looks to have stabilize on the prescription side, any update on your thinking there whether you would - your still looking for a partner or would you would look to detail this yourself given the longer runway you now have? Thank you.

[Mark Sirgo:]

Yes, Brandon, thank you for the questions. I'll take the first one in terms of [indiscernible]. I think it's going to be a combination of things. I think, like I said in my formal comments, that a lot of this insurance plans are starting to feel the pressure of having to explain why they have the formulary set up the way that they do. So I think, common sense, I think it's telling them they need to revisit and make the appropriate changes. So I think it will happen naturally. But I think our effort is to hit it from all angles. Because what we're seeing is in order to really help this opioid crisis and we're not the sole answer here by any means, but we certainly we think are a safe alternative that what a lot of these plans are advocating right now. So through government advocacy, legislation, I think just realizing they need to make change for the right reason. I think we're going to see that happening throughout 2018. And I think all of that's going to play to our benefit. I'll take the third question as well and I'll leave the second one to somebody else. But in terms of BUNAVAIL where we may go with that? I think all of the options are obviously open. As we enhanced the size of the salesforce, we may be able to put a little more pressure on some of the key prescribers. At the same time, our real focus is on improving our managed care positioning and seek the types of contracts, where we would be more exclusive in therefore, putting more sales pressure behind it would make a lot more sense. So we think -- there's a combination of things there that we could do to maintain and potentially grow the business. At the same time, as I mentioned, with the Teva arrangement now in place, it provides a lot of certainty to the future of that product, so we'll consider other options around the product at the same time. And your second question, I was little more vague on Al how do you pick up that it.

[Al Medwar:]

So it's more or around how you could benefit by some of these changes that we're seeing, including things such as the consideration of removing oxymorphone, did I get that properly?

[Brandon Folkes:]

Yes.

[Mark Sirgo:]

Thank you. I'm happy to answer it too because I think this movement moving towards what they would like to see as non-opioid, of course, that's not going to happen in the foreseeable future, but just better educating physicians around the use of opioids, considering the type of opioid that are used in a given patient, monitoring patients on opioids appropriately for abuse issues, potential addition and so on. But again, I think our effort to highlight the benefits of buprenorphine, which DEA has designated Schedule III meaning less abuse and less addiction and as being the only opioid, prescription opioid, that has a ceiling effect on respiratory depression, which, of course, causes death and overdose, I think it just lends itself to physicians who are trying to make responsible decisions now around what opioid to use.

[Brandon Folkes:]

Great. And Mark, congratulations on everything, putting a company [indiscernible] in a very strong position. So best of luck with your future endeavours.

[Mark Sirgo:]

Thank you. Much appreciated.

[Operator:]

[Operator Instructions] We'll go next to Oren Livnat with H.C. Wainwright,

[Oren Livnat:]

Thanks for taking the question, guys. You mentioned a few changes that you'd like to see happen, maybe top-down given all the lobbying that's going on in D.C. You mentioned labeling as one of those. In a perfect world, what could be different in your label that would help you out commercially?

[Mark Sirgo:]

Yes. Sure. So if you look at our label and particularly take a look at the black box warnings, you'll notice that they are identical to what you'll find in a Category II opioid black box warning.

[Oren Livnat:]

So you want to get that removed or maybe softened?

[Mark Sirgo:]

Yes, yes. That's the -- that will be our intention on -- because doesn't make a lot of sense. And in other words, DEA has designated buprenorphine being a different molecule, a different opioid, but unfortunately, FDA hasn't made that differentiation quite yet. So yes, that's part of the effort around the regulatory aspect of what we're doing.

[Oren Livnat:]

And do you think from any interaction you've had with agencies that could happen without generating specific prospective data regarding respiratory depression risks and the like?

[Mark Sirgo:]

I can't answer that question yet.

[Oren Livnat:]

Okay. Cool. And if I could shift gears back to BELBUCA sales and net revenue. So obviously, scripts look great, heading into this quarter and the sales came in. I guess sequentially slightly down and a lot lower than we would have guessed based on the realized value per script in the past. So I understand there is a significantly higher gross to net discounts in your guiding to that going forward. So I just want to understand the slide that you're showing us of increasing value per scripts, those are sort of WAC numbers, right? And we should be taking, [indiscernible] mid-30% discount off of those, right?

[Ernie De Paolantonio:]

It's in the midst, this is Ernie. It's in the mid-to high 30s.

[Oren Livnat:]

Okay. So if…

[Ernie De Paolantonio:]

Which is just a couple of percentage points higher than we had it before, where we came in in second quarter.

[Oren Livnat:]

Okay. I have to double check the math on that. But I guess I'm just trying to figure out those are legacy contracts maybe Endo had signed that you inherited, any chance those could improve going forward? I mean, especially, if you guys do in fact get top-down pressure to put you guys in a more favorable position versus some of the C2 opioids, do you need -- should you need to pay that level of rebates to get access?

[Mark Sirgo:]

Yes. First, let me tell you that the adjustment that we've made this quarter was a one-time cumulative adjustment back to the beginning of the year. So it's important to note that. And that going forward, the adjustment has been made in the gross to net rate.

[Oren Livnat:]

When you talk about a $31 million run rates in September, is that a number that translates to quarterly reported sales, that's like net-net number?

[Ernie De Paolantonio:]

Yes, it is.

[Oren Livnat:]

Okay, cool. And again, if those -- do you think that changes anytime going forward gross to nets?

[Ernie De Paolantonio:]

I think the gross to nets have been adjusted and as we had -- as we have stated, it's in the mid to high 30s going forward.

[Oren Livnat:]

Okay.

[Mark Sirgo:]

You want us to comment on the managed care contracts that we currently have that we inherited and how we may be able to impact those going forward. Mike, you want to talk about that?

[Mike Bullock:]

Yes. So to the question about those the contracts, the ones that we did inherit obviously, part of the goal is to continue those and expand those through the next 10 cycles, which we've done with customers such as CBS and Express Script. The next step beyond that is to leverage those agreements to other PBMs, leverage some of the information that Mark had alluded to with what's happening politically in this space and the awareness in this space. So all that will play into what we're trying to do going forward with expanding the number of contracts that we have and the customers that we have those with, both on the commercial side and in the Medicare space as well.

[Oren Livnat:]

Thank you.

[Operator:]

We'll go next to Matt Kaplan with Ladenburg Thalmann.

[Matt Kaplan:]

Hi, guys, Congrats on the progress. Just wanted to dig into the contracts for BUNAVAIL a little bit, and what your visibility is for additional contracts, whether state or other contracts that you could get that really change the trajectory of those sales for BUNAVAIL?

[Mark Sirgo:]

Yes, so we're trying to be as aggressive we can be in those contracts, particularly in the markets are different on the BUNAVAIL side, we see much heavier weighting in the Medicare space, which we're actively engaged in with all the states and those trying to gain access and improve access in those states through service program. And we're certainly doing that and trying to capitalize on some of the efforts coming out of access all the products, which is probably the right thing to do. So we're certainly trying to use all that information to improve our access where we can being responsible with what we're putting out there in offering.

[Matt Kaplan:]

And so -- but in terms of visibility to new ones at this point?

[Mark Sirgo:]

Yes, there is nothing I could able to share with you at the moment as far as new contracts. They're pending.

[Matt Kaplan:]

Got it. I guess, Mark, could you update on your depot program, where that stands?

[Mark Sirgo:]

Sure. So I think as we reported last time, perhaps we got an active. We've got an approved protocol from FDA. We've got clinical trial material. So we're jus balancing the start of that program off pretty more dollars in buying BELBUCA. So everything was teed up, ready to go. We're just trying to determine where best to put our dollars moment.

[Matt Kaplan:]

And then in terms of expanding your salesforce to 85 reps from 65, what impact do you think that will be -- in terms of the man of coverage your going to have doctors you calling on?

[Mark Sirgo:]

Yes, I'll let Scott take that one.

[Scott Plesha:]

Hey, Matt, it's Scott. Thanks for the question. So I guess, a little bit of a reminder, I guess. Endo was out there with 380, 360 reps. So much more substantial launch with 65 that was on a lighter side. If you remember correctly, we very pretty much had stated on previous calls our Investor Days that we would be most likely going to 85. We've done more work. I think more importantly before we went to 85, we wanted to confirm what we believe and that trade specialty sales, be very focused in our efforts, focus on pain management and the mid-levels within pain management and not really focus on primary care. And I think we can confirm that. Currently, we're calling out about 6,500 targets we believe, there's probably an incremental 3,500 targets or so give or take a little bit that we could use better frequency or start calling on that would impact our sales. So we're looking on expansion. 20 reps isn't a lot, but it's a decent percentage for us, and we do expect to have increased sales we will be doing that going forward. So we're excited about doing that salesforce has done with the product. There are some areas that immediately when you look at the map, be a too heavy as far as targets and opportunity and we have been that we need to. So we'll do that going forward.

[Matt Kaplan:]

And Mark, we're going to miss you man.

[Mark Sirgo:]

I'll find you.

[Operator:]

We will go next to Kenneth Trbovich with Janney Montgomery Scott.

[Kenneth Trbovich:]

I guess, Mark, maybe you could go back and talk a little bit more about the BELBUCA contract specifically trying to figure out where we're at with just given the concern the military and the Department of on addiction. Where are things that on the contracting site?

[Mark Sirgo:]

Yes. Mike.

[Mike Bullock:]

Yes, this is Mike. So I'll take that one. So the -- It's a 2-phase process with the VA. So the contracting piece were done. So the pricing is there it's ever level to across the country. So pieces done. The piece we're still working on is the formulary piece. So -- and that's what the PBM comes into play. And they make a determination of which products are going to put on formulary and not put on formulary. And that's the piece of work through right now with BELBUCA is to have that review the product and make a decision put on will enhance our axis across the country and all facilities across the country. So it's 2 parts. First part is contracting piece, answer question is done. The second base as far as committee is ongoing.

[Kenneth Trbovich:]

And is that something that required each one of those PBMs have to do it separately or some sort of centralized process?

[Mike Bullock:]

It's a centralized process. The VA has 1 PBM, in those -- formulary would flow to all the facilities across the country.

[Kenneth Trbovich:]

Okay. And then does that mean sort of currently can give us a sense -- feeling you got a very little sort of existing participation with BELBUCA in that system?

[Mike Bullock:]

We do have utilization through the. I don't know if I can give you a number on what that is, but we do have utilization there. So what we'll happen -- Once we get approval on the formulary that obviously what that would increase, but we do currently have gone through the for BELBUCA.

[Kenneth Trbovich:]

Okay. And then.

[Mark Sirgo:]

And again, it's a place where we're focusing our legislative efforts as well.

[Kenneth Trbovich:]

I know it makes complete sense for all reasons you describe earlier. I guess one other question on the BUNAVAIL side. I know you and that could maybe Mark that there was less Medicaid discounting. And I was trying to better understand in the context of does that mean that mix of business has shifted? Or you somehow under better terms with existing contracts just to know some of the prescription decline that we have seen is perhaps to medicate contract that might had less benefit from an economic standpoint?

[Mark Sirgo:]

Well, we the contract, but we reduced the rebates and the discount on it.

[Kenneth Trbovich:]

Got it. You got same just under better terms?

[Mark Sirgo:]

Right.

[Kenneth Trbovich:]

Okay, terrific. I guess last question on the ONSOLIS front. It sounded like from the update that Jim provided that things were. Could you guys remind us from map BDSI perspective of the timing with regard to recognition of the milestone? Obviously, that's is a key even for next year. So just wanted to better make sure -- at least make sure I better understand the difference between the manufacturing supplement versus commercialization in the launch of which one the milestone?

[Ernie De Paolantonio:]

Kenneth, it's Ernie. When we launch, we will be able to recognize the 2 milestones. One, there's a launch milestone, and the second milestone is the patent that we had issued. And we estimate that will be sometime around the third quarter of next year.

[Kenneth Trbovich:]

Okay. Mark, I want to congratulate. Need people in the world successfully got once lived with not to mention 3 approved. So obviously, a long hard effort and congratulations on the hard work.

[Mark Sirgo:]

Thank you. Much appreciated, Ken.

[Operator:]

We'll take a follow-up question from Oren Livnat with H.C. Wainwright.

[Oren Livnat:]

You mentioned Governor Christie's draft commission report going around did mention buprenorphine couple of times that. But I think got the impression that were specifically with regard to the opioid market. And I'm wondering if buprenorphine lot of shuffle, at least in that avenue treatment, is there a momentum legislative to specifically buprenorphine as potential chronic pain treatment rather than opioid dependence sort of Medicaid market therapy? And another question I have just I missed it may be added on the Medicare formulary when you highlighted. You did say that you already getting 75% or 3 out of 4 claims approved already not covered? So can you just give us a better sense of what sort of step function or upside we should be expecting when that contract kicks in?

[Mark Sirgo:]

Sure. So your is right on your understanding of the Christie commission work. And that's the areas we're working on. Your absolutely correct. Everybody understand the benefit of buprenorphine in treating opioid dependency. Very few of people -- much lower percentage understand the benefit of buprenorphine in treating chronic pain. It seems obvious -- that most people, but is not where we're spending our time capital and educating people. And it's not a difficult to educate around it. It's like him moment for them. And that's what we are spending the time. And there's some bit of disconnect between its utilization in trading opioid disorder chronic pain. Mike, do you want to take?

[Mike Bullock:]

Yes. So just real quick. The approval rates are good find for us, right now in 75%, the gets approved the advantage for us of improving access in quarter seem to be more effective in selling allow us to benefits and formularies that we win. So that's the goal. That's what I hope is improving our axis and durability on that formularies is to enable the people when it comes the major space.

[Mark Sirgo:]

As Mike said been very successful in getting things approved in the mid-70s is a good number. But I think what it will do going forward for us is reduce the workload of on an office that is required to get a PA. PAs the ability to reduce that increases the volume that is prescribed and also trickles down to other plants and things like that. So I think it will impact our perception of coverage and what it takes to get it approved overall. So I think it's all the synergistic.

[Oren Livnat:]

I would the 1 guy I don't wish Mark well and congrats as well.

[Mark Sirgo:]

You wouldn't, but thank you. I appreciate it. Let me just comment on your question I try to respond to again. I think the other thing that maybe is not obvious there is a real climate for change, right? There is a real urgency for change. So wet things would normally take potentially years to get things change, I didn't things going to happen in real-time now. Because crisis nation is facing. So we think we got the right product. We think we are focused on the right things to do, to better educated people. I'll give you another example, the CDC guidelines for the use of opioids in treating chronic pain. They don't mention buprenorphine. So there are things like that, really smart people you wonder how they created such things. But we got people attention, the fact-based organization, delivered data to support anything we put forward. So the get great progress in 2018. And like I said that as a climate for real change and hopefully we will be successful. And bottom line is in this product should be used by patients that require an opioid, and we're just try to get better access to it. So thanks.

[Operator:]

We'll take a follow-up from Kenneth Trbovich with Janney.

[Kenneth Trbovich:]

Sorry I realized I forgotten one. Contract revenues, we haven't seen that historically for a while can you give us a sense as to what's the likelihood of that contract revenue repeating and what's associated with?

[Mark Sirgo:]

The contract revenue that we had is the milestones contract that we had the upfront and the milestone, the $1.2 million year-to-date. So again, there will be another milestone on launch next year.

[Mike Bullock:]

No, about Canadian dollars here.

[Kenneth Trbovich:]

Sure. And then and just assuming the uptick in the R&D reimbursements with the ONSOLIS piece, is that correct?

[Mark Sirgo:]

That's correct. That will end this year.

[Operator:]

This does conclude today's conference. We thank you for your participation. You may now disconnect.